In this narrated slideshow, McKinsey alumnus Markus Zils explains how the circular economy encourages companies to seek ways of retaining more of the value of the material, energy, and labor inputs that go into their products.

February 2014

The circular economy aims to eradicate waste—not just from manufacturing processes, as lean management aspires to do, but systematically, throughout the life cycles and uses of products and their components. Indeed, tight component and product cycles of use and reuse, aided by product design, help define the concept of a circular economy and distinguish it from the linear take–make­–dispose economy, which wastes large amounts of embedded materials, energy, and labor.

In the first exhibit of this narrated slideshow, McKinsey alumnus Markus Zils explains how a circular economy works. In the second, he uses the example of a market for power drills to detail four scenarios in which circular-economy principles are applied:

In the status-quo scenario, 1,000 power drills are made in China and sold in the European Union.

In the refurbishment scenario, 800 drills are sold at the original price, and 200 are refurbished and sold at 80 percent of it. As an incentive to return drills for refurbishment, customers that do so receive a 10 percent refund of the original price.

In the recycling scenario, new and refurbished drills are sold, as above, but other customers return 700 end-of-life drills for recycling that recovers some 80 percent of their materials. Customers that return drills for recycling receive a 5 percent refund on the original price.

In the additional sales scenario, new and refurbished drills are sold and 700 end-of-life drills are recycled, as above, but we assume that the refurbished drills do not cannibalize sales of the new drills. Instead, refurbished units are sold to a completely new customer segment, thus expanding the market.

In a circular economy, the goal for durable components, such as metals and most plastics, is to reuse or upgrade them for other productive applications through as many cycles as possible. This approach contrasts sharply with the linear mind-set embedded in most of today’s industrial operations. Even their terminology—value chain, supply chain, end user—expresses a linear take–make–dispose view.